April brings with it showers, as the song goes, but also an inevitable part of the personal finance journey: filing one’s tax information with the CRA for the year. The last weekday before this year’s deadline is the 29th: mark it on your calendar!
And just as April’s showers are followed by May flowers, the hard work you put into assembling your taxes in April will pay off in the form of a return that, for many, seems like an oasis in the middle of a financial desert. In fact, the average tax refund, as of 2013, was about $2,700 – which is more than a month’s worth of income for 2 out of 3 taxpayers. Even if your income is steady and you’re doing well with your financial plan, the sudden arrival of a tax return can throw a curveball into your money management.
A Bank of Nova Scotia survey found 23% of Canadians plan to use their 2011 tax refund to either deposit or reinvest, while 22% will pay off debt. The same survey found 25% expect no tax refund at all.
Refund money coming back into your accounts may incentivize you to indulge or treat yourself to a lavish purchase when in fact it might be best used elsewhere. And so the questions arise: what to do with your refund? Splurge? Invest? Save? A bit of each? Don’t fall into the “free money” trap – be smart with your refund! Here are some of the best ways to take advantage of your organization and preparedness come tax time.
Use It To Pay Down Debt
If you have any debts outstanding, money from your tax refund can be a great way to squash them quickly. This is one of the smartest ways to use your refund, as it saves you more money on interest and fees throughout the year and in the years to come. It’s an investment in your wealth that doesn’t have to be tied to a financial instrument. The simple act of using your refund to pay off an extra $1,000 of debt this year could save you hundreds of dollars in future finance charges. The average household with debt in North America has over $15,000 in debt, and the average APR is just under 15%. Putting $2,700 towards that debt could shave over 8 years off the payoff date and save $17k in interest. Doing it every year would pay off the debt over 14 years earlier and save almost $24k in interest.
Build Your Emergency Fund
Experts suggest that an emergency fund should have between three and six months’ salary stashed away to cover essential expenses including rent or mortgage payments, groceries, utilities and insurance. Your tax refund may constitute a significant portion of that amount. Putting aside this money for a rainy day ensures you don’t have to borrow from your line of credit, or worse still, your high-interest credit card.
Plan for the Future
Whether you’re 25 or 55, it’s always a good idea to be putting something away for those years when you’re no longer working. Canadians have two basic investment vehicles to save for retirement; an RRSP or TFSA – and both have their own advantages and disadvantages. Speak to an advisor to find out what kind of contribution will make the most impact on your long-term financial health.
Jump Start Your Next Big Idea
Have a great idea for a side hustle? Want to finally get the training you were always thinking about so you could design that website, finish that marketing plan, buy that equipment, start something new that will bring you both personal and financial rewards? Your refund could be the spark you need to get it off the ground.